Category Archives: Tablets

Think back to last December, just before the holidays. You might recall a Reuters report, quoting “people with knowledge of the situation,” claiming that Research in Motion (RIM) rejected takeover propositions from Amazon.com and others.

The report wasn’t clear on whether the informal discussions resulted in any talk of price between Amazon and RIM, but apparently no formal offer was made. RIM, then still under the stewardship of former co-CEOs Jim Balsillie and Mike Lazaridis, reportedly preferred to remain independent and to address its challenges alone.

I Know What You Discussed Last Summer

Since then, a lot has happened. When the Reuters report was published — on December 20, 2011 — RIM’s market value had plunged 77 percent during the previous year, sitting then at about $6.8 billion. Today, RIM’s market capitalization is $3.7 billion. What’s more, the company now has Thorsten Heins as its CEO, not Balsillie and Lazardis, who were adamantly opposed to selling the company. We also have seen recent reports that IBM approached RIM regarding a potential acquisition of the Waterloo, Ontario-based company’s enterprise business, and rumors have surfaced that RIM might sell its handset business to Amazon or Facebook.

Meanwhile, RIM’s prospects for long-term success aren’t any brighter than they were last winter, and activist shareholders, not interested in a protracted turnaround effort, continue to lobby for a sale of the company.

As for Amazon, it is said to be on the cusp of entering the smartphone market, presumably using a forked version of Android, which is what it runs on the Kindle tablet. From the vantage point of the boardroom at Amazon, that might not be a sustainable long-term plan. Google is looking more like an Amazon competitor, and the future trajectory of Android is clouded by Google’s strategic considerations and by legal imbroglios relating to patents. Those presumably were among the reasons Amazon approached RIM last December.

Amazon has never been a big supporter of Google’s Android OS for its Kindle. And Google’s never been keen on promoting Amazon as part of the Android ecosystem. It seems that both companies know this is just a matter of time before each leaves the other.

Yes, there’s some question as to how much value inheres in RIM’s patents. Estimates on their worth are all over the map. Nevertheless, RIM’s QNX mobile-operating system could look compelling to Amazon. With QNX and with RIM’s patents, Amazon would have something more than a contingency plan against any strategic machinations by Google or any potential litigiousness by Apple (or others). The foregoing case, of course, rests on the assumption that QNX, rechristened BlackBerry 10, is as far along as RIM claims. It also rests on the assumption that Amazon wants a mobile platform all its own.

It was last summer when Amazon reportedly made its informal approach to RIM. It would not be surprising to learn that a reprise of discussions occurred this summer. RIM might be more disposed to consider a formal offer this time around.

The point of this post, though, will be to look forward. Perhaps Cisco can learn an important lesson from its Cius misadventure. If Cisco is fortunate, it will come away from its tablet failure with valuable insights into itself as well as into the markets it serves.

Negative Origins

While I would not advise any company to navel-gaze obsessively, introspection doesn’t hurt occasionally. In this particular case, Cisco needs to understand what it did wrong with the Cius so that it will not make the same mistakes again.

If Cisco looks back in order to look forward, it will find that it pursued the Cius for the wrong reasons and in the wrong ways. Essentially, Cisco launched the Cius as a defensive move, a bid to arrest the erosion of its lucrative desktop IP-phone franchise, which was being undermined by unified-communications competition from Microsoft as well as from the proliferation of mobile devices and the rise of the BYOD phenomenon. The IP phone’s claim to desktop real estate was becoming tenuous, and Cisco sought an answer that would provide a new claim.

In that respect, then, the Cius was a reactionary product, driven by Cisco’s own fears of desktop-phone cannibalization rather than by the allure of a real market opportunity. The Cius reeked of desperation, not confidence.

Hardware as Default

While the Cius’ genetic pathology condemned it at birth, its form also hastened its demise. Cisco now is turning exclusively to software (Jabber and WebEx) as answers to enterprise-collaboration conundrum, but it could have done so far earlier, before the Cius was conceived. By the time Cisco gave the green light to Cius, Apple’s iPhone and iPad already had become tremendously popular with consumers, a growing number of whom were bringing those devices to their workplaces.

Perhaps Cisco’s hubris led it to believe that it had the brand, design, and marketing chops to win the affections of consumers. It has learned otherwise, the hard way.

But let’s come back to the hardware-versus-software issue, because Cisco’s Cius setback and how the company responds to it will be instructive, and not just within the context of its collaboration products.

Early Warning from a Software World

As noted previously, Cisco could have gone with a software-based strategy before it launched the Cius. It knew where the market was heading, and yet it still chose to lead with hardware. As I’ve argued before, Cisco develops a lot of software, but it doesn’t act (or sell) like software company. It can sell software, but typically only if the software is contained inside, and sold as, a piece of hardware. That’s why, I believe, Cisco answered the existential threat to its IP-phone business with the Cius rather than with a genuine software-based strategy. Cisco thinks like a hardware company, and it invariably proposes hardware products as reflexive answers to all the challenges it faces.

At least with its collaboration products, Cisco might have broken free of its hard-wired hardware mindset. It remains to be seen, however, whether the deprogramming will succeed in other parts of the business.

In a world where software is increasingly dominant — through virtualization, the cloud, and, yes, in networks — Cisco eventually will have to break its addiction to the hardware-based business model. That won’t be easy, not for a company that has made its fortune and its name selling switches and routers.

For better or worse, Hewlett-Packard remains committed to the personal-computer business, neither selling off nor spinning off that unit in accordance with the wishes of its former CEO. At the same, Dell is claiming that it is “not really a PC company,” even though it will continue to sell an abundance of PCs.

Why are these two vendors staying the course in a low-margin business? The popular theory is that participation in the PC business affords supply-chain benefits such as lower costs for components that can be leveraged across servers. There might be some truth to that, but not as much as you might think.

At the outset, let’s be clear about something: Neither HP nor Dell manufactures its own PCs. Manufacture of personal computers has been outsourced to electronics manufacturing services (EMS) companies and original design manufacturers (ODMs).

Growing Role of the ODM

The latter do a lot more than assemble and manufacture PCs. They also provide outsourced R&D and design for OEM PC vendors. As such, perhaps the greatest amount of added value that a Dell or an HP brings to its PCs is represented by the name on the bezel (the brand) and the sales channels and customer-support services (which also can be outsourced) they provide.

Major PC vendors many years ago decided to transfer manufacturing to third-party companies in Taiwan and China. Subsequently, they also increasingly chose to outsource product design. As a result, ODMs design and manufacture PCs. Typically ODMs will propose various designs to the PC vendors and will then build the models the vendors select. The PC vendor’s role in the design process often comes down to choosing the models they want, sometimes with vendor-specified tweaks for customization and market differentiation.

In short, PC vendors such as HP and Dell don’t really make PCs at all. They rebrand them and sell them, but their involvement in the actual creation of the computers has diminished markedly.

Apple Bucks the Trend

At this point, you might be asking: What about Apple? Simply put, unlike its PC brethren, Apple always has insisted on controlling and owning a greater proportion of the value-added ingredients of its products.

Unlike Dell and HP, for example, Apple has its own operating system for its computers, tablets, and smartphones. Also unlike Dell and HP, Apple did not assign hardware design to ODMs. In seeking costs savings from outsourced design and manufacture, HP and Dell sacrificed control over and ownership of their portable and desktop PCs. Apple wagered that it could deliver a premium, higher-cost product with a unique look and feel. It won the bet.

A Spurious Claim?

Getting back to HP, does it actually derive economies of scale for its server business from the purchase of PC components in the supply chain? It’s possible, but it seems unlikely. The ODMs with which HP contracts for design and manufacture of its PCs would get a much better deal on component costs than would HP, and it’s now standard practice for those ODMs to buy common components that can be used in the manufacture and assembly of products for all their brand-name OEM customers. It’s not clear to me what proportion of components in HP’s PCs are supplied and integrated by the ODMs, but I suspect the percentage is substantial.

On the whole, then, HP and Dell might be advancing a spurious argument about remaining in the PC business because it confers savings on the purchase of components that can used in servers.

Diagnosing the Addiction

If so, then, why would HP and Dell remain in the PC game? Well, the answer is right there on the balance sheets of both companies. Despite attempts at diversification, and despite initiatives to transform into the next IBM, each company still has a revenue reliance on — perhaps even an addiction to — PCs.

According to calculations by Sterne Agee analyst Shaw Wu, about 70 to 75 percent of Dell revenue is connected to the sale of PCs. (Dell derived about 43 percent of its revenue directly from PCs in its most recent quarter.) In relative terms, HP’s revenue reliance on PCs is not as great — about 30% of direct revenue — but, when one considers the relationship between PCs and related related peripherals, including printers, the company’s PC exposure is considerable.

If either company were to exit the PC business, shareholders would react adversely. The departure from the PC business would leave a gaping revenue hole that would not be easy to fill. Yes, relative margins and profitability should improve, but at the cost of much lower channel and revenue profiles. Then there is the question of whether a serious strategic realignment would actually be successful. There’s risk in letting go of a bird in hand for one that’s not sure to be caught in the bush.

ODMs Squeeze Servers, Too

Let’s put aside, at least for this post, the question of whether it’s good strategy for Dell and HP to place so much emphasis on their server businesses. We know that the server business faces high-end disruption from ODMs, which increasingly offer hardware directly to large customers such as cloud service providers, oil-and-gas firms, and major government agencies. The OEM (or vanity) server vendors still have the vast majority of their enterprise customers as buyers, but it’s fair to wonder about the long-term viability of that market, too.

As ODMs take on more of the R&D and design associated with server-hardware production, they must question just how much value the vanity OEM vendors are bringing to customers. I think the customers and vendors themselves are asking the same questions, because we’re now seeing a concerted effort in the server space by vendors such as Dell and HP to differentiate “above the board” with software and system innovations.

Fear Petrifies

Can HP really become a dominant purveyor of software and services to enterprises and cloud service providers? Can Dell be successful as a major player in the data center? Both companies would like to think that they can achieve those objectives, but it remains to be seen whether they have the courage of their convictions. Would they bet the business on such strategic shifts?

Aye, there’s the rub. Each is holding onto a commoditized, low-margin PC business not because they like being there, but because they’re afraid of being somewhere else.

Like this:

Michael Dell has derived great pleasure from HP’s apparent decision to spin off its PC business. As he has been telling the Financial Times and others recently, Dell (the company) believes having a PC business will be a critical differentiator as it pulls together and offers complete IT solutions to enterprise, service-provider, and SMB customers.

Hardware Edge?

Here’s what Dell had to say to the Financial Times about his company’s hardware-based differentiation:

“We are very distinct from some of our competitors. We believe the devices and the hardware still matter as part of the complete, end-to-end solution . . . . Think about the scale economies in our business. As a company spins off its PC business, it goes from one of the top buyers in the world of disk drives and processors and memory chips to not being one of the top five. And that raises the cost of making servers and storage products. Ultimately we believe that presents an enormous opportunity for us and you can be sure we are going to seize it.”

Well, perhaps. I don’t know the intimate details of Dell’s PC economies of scale or its server-business costs, nor do I know what HP’s server-business costs will be when (and if) it eventually spins off its PC business. What I do know, however, is that IBM doesn’t seem to have difficulty competing and selling servers as integral parts of its solutions portfolio; nor does Cisco seem severely handicapped as it grows its server business without a PC product line.

Consequences of Infatuation

I suspect there’s more to Dell’s attachment to PCs than pragmatic dollars-and-cents business logic. I think Michael Dell likes PCs, that he understands them and their business more than he understands the software or services market. If I am right in those assumptions, they don’t suggest that Dell necessarily is wrong to stay in the PC business or that it will fail in selling software and services.

Still, it’s a company mindset that could inhibit Dell’s transition to a world driven increasingly by the growing commercial influence of cloud-service providers, the consumerizaton of IT, the proliferation of mobile devices, and the value inherent in software that provides automation and intelligent management of “dumb” industry-standard hardware boxes.

To be clear, I am not arguing that the “PC is dead.” Obviously, the PC is not dead, nor is it on life support.

In citing market research suggesting that two billion of them will be sold in 2014, Michael Dell is right to argue that there’s still strong demand for PCs worldwide. While tablets are great devices for the consumption of content and media, they are not ideal devices for creating content — such as writing anything longer than a brief email message, crafting a presentation, or working on a spreadsheet, among other things. Although it’s possible many buyers of tablets don’t create or supply content, and therefore have no need for a keyboard-equipped PC, I tend to think there still is and will be a substantial market for devices that do more than facilitate the passive consumption of information and entertainment.

End . . . or Means to an End?

Notwithstanding the PC market’s relative health, the salient question here is whether HP or Dell can make any money from the business of purveying them. HP decided it wanted the PC’s wafer-thin margins off its books as it drives a faster transition to software and services, whereas Dell has decided that it can live with the low margins and the revenue infusion that accompanies them. In rationalizing that decision, Michael Dell has said that “software is great, but you have to run it on something.”

There’s no disputing that fact, obviously, but I do wonder whether Dell is philosophically disposed to think outside the box, figuratively and literally. Put another way, does Dell see hardware as a container or receptacle of primary value, or does it see it as a necessary, relatively low-value conduit through which higher-value software-based services will increasingly flow?

I could be wrong, but Michael Dell still seems to see the world through the prism of the box, whether it be a server or a PC.

For me, Dell’s decision to maintain his company’s presence in PCs is beside the point. What’s important is whether he understands where the greatest business value will reside in the years to come, and whether he and his company can remain focused enough to conceive and execute a strategy that will enable them to satisfy evolving customer requirements.

Much has been made of alleged strains in the relationship between the progenitors of Wintel — Microsoft’s Windows operating system and Intel’s microprocessors — but business partnerships are not affairs of the heart; they’re always pragmatic and results oriented. In this case, each company is seeking growth and pursuing its respective interests.

I don’t believe there’s any malice between Intel and Microsoft. The two companies will combine on the desktop again in early 2012, when Microsoft’s Windows 8 reaches market on PCs powered by Intel’s chips as well as on systems running the ARM architecture.

Put simply, Intel must pursue growth in mobile markets and data centers. Microsoft must similarly find partners that advance its interests. Where their interests converge, they’ll work together; where their interests diverge, they’ll go in other directions.

Just Business

In PCs, the Wintel tandem was and remains a powerful industry standard. In mobile devices, Intel is well behind ARM in processors, while Microsoft is well behind Google and Apple in mobile operating systems. It makes sense that Intel would want to align with a mobile industry leader in Google, and that Microsoft would want to do likewise with ARM. A combination of Microsoft and Intel in mobile computing would amount to two also-rans combining to form . . . well, two also-rans in mobile computing.

So, with Intel and Microsoft, as with all alliances in the technology industry, it’s always helpful to remember the words of Don Lucchesi in The Godfather: Part III: “It’s not personal, it’s just business.”

Long before that, back in June, Avaya first indicated that it would file for an IPO, from which it hoped to raise about $1 billion. Presuming the IPO goes ahead before the end of this year, Avaya could find itself valued at $5 billion or more, which would be about 40 percent less than private-equity investors Silver Lake and TPG paid to become owners of the company back in 2007.

Proceeds for Debt Relief

Speaking of which, Silver Lake and TPG will be hoping the IPO can move ahead sooner rather than later. As parents and controlling shareholders of Avaya, their objectives for the IPO are relatively straightforward. They want to use the proceeds to pay down rather substantial debt (total indebtedness was $6.176 billion as of March 31), redeem preferred stock, and pay management termination fees to its sponsors, which happen to be Silver Lake and TPG. (For the record, the lead underwriters for the transaction, presuming it happens, are J.P. Morgan, Morgan Stanley, and Goldman Sachs & Company.)

In filing for the IPO, Avaya has come clean not only about its debts, but also about its losses. For the six-month period that end on March 31, Avaya recorded a net loss of $612 million on revenue of $2.76 billion. It added a further net loss of $152 million losses the three-month period ended on June 30, according to a recent 10-Q filing with the SEC, which means it accrued a net loss of approximately $764 million in its first three quarters of fiscal 2011.

Big Losses Disclosed

Prior to that, Avaya posted a net loss of $871 million in its fiscal 2010, which closed on September 30 of 2010, and also incurred previous losses of $835 million in fiscal 2009 and a whopping $1.3 billion in fiscal 2008.

Revenue is a brighter story for the company. For the one months ended June 30, Avaya had revenue of more than $2.2 billion, up from $1.89 billion in the first nine months of fiscal 2010. For the third quarter, Avaya’s revenue was $729 million, up from $700 million in the corresponding quarter a year earlier.

What’s more, Avaya, which bills itself as a “leading global provider of business collaboration and communications solutions,” still sits near the front of the pack qualitatively and quantitatively in the PBX market and in the unified-communications space, though its standing in the latter is subject to constant encroachment from both conventional and unconventional threats.

Meanwhile, Gartner lists Avaya among the market leaders in its Magic Quadrant for unified communications, but the threats there are many and increasingly formidable. Microsoft and Cisco top the field, with Avaya competing hard to stay in the race along with Siemens Enterprise Networks and Alcatel-Lucent. ShoreTel is gaining some ground, and Mitel keeps working to gain a stronger channel presence in the SMB segment. In the UC space, as in so many others, Huawei looms as potential threat, gaining initial traction in China and in developing markets before making a stronger push in developed markets such as Europe and North America.

There’s an irony in Microsoft’s Lync Server 2010 emerging as a market-leading threat to Avaya’s UC aspirations. As those with long memories will recall, Microsoft struck a valuable UC-centric strategic alliance — for Microsoft, anyway — with Nortel Networks back in 2006. Microsoft got VoIP credibility, cross-licensed intellectual property, IP PBX expertise and knowledge — all of which provided a foundation and a wellspring for what Microsoft eventually wrought with Lync Server 2010.

The Nortel Connection

What did Nortel get from the alliance? Well, it got some evanescent press coverage, a slippery lifeline in its faltering battle for survival, and a little more time than it might have had otherwise. Nortel was doomed, sliding into irrelevance, and it grabbed at the straws Microsoft offered.

Now, let’s fast forward a few years. In September 2009, Avaya successfully bid for Nortel’s enterprise solutions business at a bankruptcy auction for a final price of $933 million. Avaya’s private-equity sponsors saw the Nortel acquisition as the finishing touch that would position the company for a lucrative IPO. The thinking was that the Nortel going-out-of-business sale would give Avaya an increased channel presence and some incremental technology that would help it expand distribution and sales.

My feeling, though, is that Avaya overpaid for the Nortel business. There’s a lot of Nortel-related goodwill still on Avaya’s books that could be rendered impaired relatively soon or further into the future. In addition to Nortel’s significant debt and its continuing losses, watch out for further impairment relating to its 2009 purchase of Nortel’s assets.

As Microsoft seeks to take UC business away from Avaya with expertise and knowhow it at least partly obtained through a partnership with a faltering Nortel, Avaya may also damage itself through acquisition and ownership of assets that it procured from a bankrupt Nortel.

My take on consumerization of IT is that it makes sense, and probably is an unstoppable force, when it comes to the utilization of mobile hardware such as smartphones and tablets (the latter composed primarily and almost exclusively of iPads these days).

This is a mutually beneficial arrangement. Employees are happier, not to mention more productive and engaged, when using their own computing and communications devices. Employers benefit because they don’t have to buy and support mobile devices for their staff. Both groups win.

Everybody Wins

Moreover, mobile device management (MDM) and mobile-security suites, together with various approaches to securing applications and data, mean that the security risks of allowing employees to bring their devices to work have been sharply mitigated. In relation to mobile devices, the organizational rewards of IT consumerization — greater employee productivity, engaged and involved employees, lower capital and operating expenditures — outweigh the security risks, which are being addressed by a growing number of management and security vendors who see a market opportunity in making the practice safer.

In other areas, though, the case in favor of IT consumerization is not as clear. In his piece, Harris questions whether VMware will be successful with a Dropbox-like application codenamed Project Octopus. He concludes that those already using Dropbox will be reluctant to swap it for a an enterprise-sanctioned service that provides similar features, functionality, and benefits. He posits that consumers will want to control the applications and services they use, much as they determine which devices they bring to work.

Data and Applications: Different Proposition

However, the circumstances and the situations are different. As noted above, there’s diminishing risk for enterprise IT in allowing employees to bring their devices to work. Dropbox, and consumer-oriented data-storage services in general, is an entirely different proposition.

Enterprises increasingly have found ways to protect sensitive corporate data residing on and being sent to and from mobile devices, but consumer-oriented products like Dropbox do an end run around secure information-management practices in the enterprises and can leave sensitive corporate information unduly exposed. The enterprise cost-benefit analysis for a third-party service like Dropbox shows risks outweighing potential rewards, and that sets up a dynamic where many corporate IT departments will mandate and insist upon company-wide adoption of enterprise-class alternatives.

Just as I understand why corporate minders acceded to consumerization of IT in relation to mobile devices, I also fully appreciate why corporate IT will draw the line at certain types of consumer-oriented applications and information services.